Question

You hear on the news that the​ S&P 500 was down 2.6 % today relative to the​ risk-free rate​ (the market's excess return was negative 2.6 % ). You are thinking about your portfolio and your investments in Zynga and Proctor and Gamble. a. If​ Zynga's beta is 1.3​, what is your best guess as to​ Zynga's excess return​ today? b. If Proctor and​ Gamble's beta is 0.4​, what is your best guess as to​ P&G's excess return​ today?

Answer 1

a.

Excess return for Zynga today will be -3.38%

b.

Excess return on P&G today will be -1.04%

Step-by-step explanation:

The excess return is the return earned above/beyond the benchmark return. This benchmark can be set at either the risk free rate or any other stock or portfolio's return.

The return on a stock is usually calculated using the CAPM equation. The CAPM considers risk free rate, the return on market and the stock's beta to calculate the expected return on a stock.

The market always has a beta of 1. Beta is the measure of the volatility of stock returns. If the excess return on the market falls or rises, the effect of this on a stock's excess return will be based on its beta.

a.

The excess return of Zynga today will be = -2.6% * 1.3 = -3.38%

b.

The excess return of P&G today will be = -2.6% * 0.4 = -1.04%